Think You Can’t Afford an Emergency Fund? Think Again!

This post is from new GRS staff writer Donna Freedman. Donna writes the Living With Less personal finance column for MSN Money, and writes about frugality and intentional living at Surviving And Thriving.

Once upon a time it was enough to have a three-month emergency fund; now I hear we should aim for enough to cover a year’s worth of food, shelter, and other basics. A swell idea in theory, but this could actually discourage saving. Many people feel they could never set aside that much money, so why bother trying. Why? Because even a moderate emergency fund helps keep you solvent, that’s why.

Suppose you get a nail in your tire and your wallet holds nothing except some lonely moths. Without a cash cushion, you’ll have to put that new radial on a credit card or, god forbid, take out a payday loan.

The good news: You can start by shooting for the minimum $500 in the bank recommended by MSN columnist Liz Pulliam Weston. The better news: It’s possible to nickel-and-dime your way to that goal.

Microsaving, maximum results
Lynn, a woman whose just-out-of-grad-school salary was very low, figured the most she could bank would be $10 a month. She actually asked herself, “What’s the point?” But she started with a single sawbuck per month. She added a little birthday money. And then she got motivated, boosting her balance with techniques such as:

A decade later, Lynn has built up a six-month fund along with separate (and healthy) accounts for vacations, retirement, and a down payment on a someday home. She could just have easily remained stuck in a “what’s the point?” mentality.

Nancy banks the money she saves using grocery coupons. (Remember: It’s not savings unless you save it.) And one woman I know picks up dropped coins and banks these “street funds” along with manufacturers’ rebates, tax refunds, and money from her side hustles.

Look for your own microsavings tactics. Suppose you brought soda from home instead of hitting the pop machine every day at 2 p.m.? Or spent one or two Saturdays a month at the library catching up on magazines vs. subscribing to them? (And while you’re there, borrowing DVDs instead of using Netflix or Redbox?)

What if you packed your lunch even once or twice a week? Sent free e-cards instead of traditional greeting cards? Put together a dinner from what’s on hand instead of picking up a rotisserie chicken at the market? Reconsidered cable TV?

Let’s assume this let you set aside just $2 to $10 a week. In a year, that would be $104 to $520 that would otherwise have gone to soft drinks, periodicals, or the dollar menu.

Set it and forget it?
A great way to build your emergency fund is to automate it. Do this now, even if it’s only $5 a month to start. You’ll learn to live on what’s left. One woman I interviewed began by banking an hour’s gross salary each payday; now she’s up to four hours.

Some banks offer cash incentives to open a checking account; let that be your EF seed money. Make the account “one-way,” i.e., no debit card. You might even decide to choose an online bank, especially since interest rates are often higher. Remember: The money shouldn’t be too easy to access.

Give this account a name. One reader calls it her “Oh, shit!” fund, since its purpose is to cover things that go wrong. Call it “My EF,” call it “The Contingency Fund” — call it “Billy the Bank” if that’s what it takes to remind you that this is not a general fund, to be dipped into any time you want a pizza.

Change a habit, even temporarily. Plan a “pantry challenge” or institute Meatless Monday. Give up fast food, salty snacks or soda for a week, or a month. (Or forever.) Figure out what you would have spent. Bank it.

Let people know you’re available to pet-sit, clean attics, design web pages, whatever. I still babysit occasionally, earning $40 to $50 a night (and at least half of that night is me sitting and reading after the kids are asleep).

Just before payday, move whatever’s left in checking into the fund.

“Round up” each transaction, e.g., record a $6.39 debit-card purchase as $7. Add up the “extra” each month and shuttle it off to the emergency fund. Some banks will do this for you and possibly provide matching funds.

Sell items on Craigslist or eBay.

Ask friends (in-person or online) to join you in a savings support group. Or propose an “EF challenge” with your most competitive pal.

Yes, saving is hard. Here’s what’s harder: Paying off that new tire while interest is compounding. Just for fun I used this credit-card payoff calculator at Index Credit Cards. Assuming you bought a $120 tire at 18% interest and could afford only $10 payments, it would take 14 months to pay it off in full.

This won’t be the only emergency you’ll ever face — and you could have paid cash if only you’d skipped some of those magazines and cheeseburgers.

GRS is committed to helping our readers save and achieve their financial goals. Savings interest rates may be low, but that is all the more reason to shop for the best rate. Find the highest savings interest rates and CD rates from Synchrony Bank, Ally Bank, and more.

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Every little bit counts. Here in South Africa, a lot of people earn less than half of the $875 mentioned in #45 per MONTH, nevermind every 2 weeks, so I am all for saving whichever little bit can be saved each month or each week, whichever works best for you.

Purely through saving our coins and those we pick up, as well as survey incomes, hubby and I will be able to purchase a $1200 bed for cash – a much-needed purchase, as we both suffer from back and hip problems.

To those who are only able to save a little at a time, don’t be discouraged. Contrary to what was mentioned in #45, every little bit truly DOES count.

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Cathy Moran

I’m a bankruptcy lawyer, and see untold number of people in their 40’s and more with nothing saved for retirement.

I’m starting to think of promoting saving half of the cost of the lunch out today, so that there will be a lunch of any sort when you’re 70.

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Lincoln

@ Tyler K

Under your logic, anyone that can’t save at least a certain threshold amount for an emergency fund shouldn’t bother at all. I don’t think that is fair. Maybe $20 means more to someone else than $1,000 means to you.

Likewise, under your logic, anyone that is causing fewer problems than an outrageous car driver should not be complained about. I reject your premise and basis for comparison. I would prefer that everyone out on the streets — cars, bikes, and pedestrians — follow the traffic rules. Just because bicyclists may not be as bad or as dangerous as car drivers, that doesn’t mean they should get a free pass for doing stupid things.

People have different perspectives.

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The Saved Quarter

Last year, my goal was to save a quarter of my family’s income. We were living on a very low income (still are) and getting public assistance, and thought that if I had enough in savings for an emergency, I could reach financial stability and get off of assistance.

I saved everything. I paid myself first, $100 a month from our $1600 a month take home pay. I then cut my expenses, did odd jobs, mystery shopping, babysitting, picked up money off the ground, did refunds, found lots of ways to bring in a little extra and spend less, and met my goal. I saved my goal of $6k last year – a 3 month emergency fund – making very little money.

This year, I’m hosting a challenge to encourage others to save along with me. I understand starting at a few bucks a week, if that’s what you have. You have to start where you are and make it a priority.

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Anonymous

@ Vanessa (#30): I’m reacting to the implicit idea that we’re not free to choose where we live. Many of us are, even if kids are involved, and exploring the implications of different places for cost-of-living and lifestyle is so important. We can move to places with better public transportation or make sure that we make >$10,000/y more than we otherwise would if our work requires we drive a car or we live without a grocery store within walking distance. I bring up other countries simply because the norms can be so different, and being forced to live differently can help us realize our options and implicit assumptions (e.g., to be happy, I need a dog, I need a house, etc.). Other countries are, of course, also places where many of us could live. The idea that we’re victims of the landscape and local infrastructure just makes me sad, and it exacerbates some non-sustainable environmental dependencies. It’s true that a lot of the population is stuck, and that’s terrible, but I suspect most readers of this blog have plenty of options available.

I agree with you on the general point that it’s pointless to attack people for not being aware of something. That said, past initial exposure, there are different stages of awareness and denial, and they’re confounded by spirituality and circumstances. I was excessively frustrated yesterday from reading about the unnecessary, avoidable suffering described in this article.

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marian

I believe in having an emergency store of food that will last at least a couple of months. I am not a survivalist but it is very comforting during a period of financial stress to know that there is enough food in the house. Stock mostly basics, rice, beans, tuna, canned tomatoes and other fruits & vegies but throw in a few treats too. Similary, if you are stocked up on lightbulbs, toilet paper, toothpaste – all bought on sale, you don’t have to worry about those during an emergency. Thus more money is available for your regular bills while you face the emergency. However, you still need money in an emergency fund and if its a small emergency fund, fewer things or situations should be considered an emergency. If you have $500 in an emergency fund and you need to replace a tire so that your car can get you to work (assuming there is absolutely no other way to get there)then you should use the fund. But what if the fridge goes? An emergency? Any new fridge is at least $450 – $500. Yet if its winter and 32 degrees outside,you can store things outside in a cooler and buy fresh meat 2x week until you save for a fridge. Or you can find a 0% int deal if you look carefully and then pay it all off over the term, or you can buy a used fridge or find one on freecycle. The thing about any emergency, financial or otherwise is not to panic but to think. The smaller the emergency fund, the more you have to think about how to make do and conserve the fund.

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20 and Engaged

What I used to do is take the amount I saved grocery shopping and put that in my savings account. I unfortunately wiped out my mini E-fund and have to start from scratch but the point is I’m starting again.

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Mary Beth

I’ve instituted a microsaving plan with a second, part-time job. I put one-third in savings, use one-third to pay downan IOU, and spend one-third on my clothing. The psychology of win, win, win!

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Nicole

Ditto to everybody on the CD laddering. Back when we had a lot less money, the interest earned in the CD made a big difference on money that we had to save anyway so we could live on it. It’s especially helpful if you’re paid on a 9 month salary (or 2x a year as we were at the time).

These days we’re more like Tyler K, but I remember the tough times! Having even a little emergency buffer helped avoiding late fees when things like reimbursements (or rebates, or even worse, paychecks!) weren’t processed on time. $500 can make an enormous difference if you’re living close to the bone.

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suzy

I agree with everything except the “free ecards instead of traditional greeting cards”. I’d rather not receive anything than get one of those awful ad-heavy free e-cards. Nothing makes me feel less special than getting one of those. Either write/design a real, personal note and personally email it to the person, or use the paper you have laying around the house to make and send a real card. I make cards and wrapping paper out of repurposed paper shopping bags all the time, and people love them. It’s the thought that counts, and those e-cards are pretty thoughtless, IMO.

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Pat S

You’ve got to have an emergency fund. Without one, you are one bad day away from financial ruin. Setting goals for my emergency fund has helped. I’ve been trying to add a month of emergency cash every 6 months. Probably somewhat aggressive, but it’s tangible and helps me stay on the ball.

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PigPennies

I wasn’t even thinking about an emergency fund until the economy started crumbling, and as it crumbled the experts kept recommending a bigger and bigger cushion. It felt like I kept getting further behind even though I was in exactly the same place. The thing that finally helped me get over it was plummeting interest rates. I’m not willing to put a years worth of expenses in a savings account making 1.3% at most. Even if I had that kind of money lying around, I would want it to be working harder than that for me.

So the husband and I got started with $500 each to keep our savings accounts fee-free. Then we worked up another $1000 each into accounts at a local credit union that pays 6% on the first $1000. That gives us a $3000 cushion – nothing that we could live of off for a year if we both lost our jobs, but at least a little cushion that we could rely on for smaller emergencies. After that we started contributing $500 each into Roth IRA’s. We’ll have met the max 2010 contribution next month, and will max out 2011 by the end of the year. That means we’ll have another $20,000 over our $3000 cushion by December. Even though I don’t want to ever touch that money, we can withdraw contributions (not earnings) penalty free in case of a bigger emergency.

Attacking our emergency fund at the same time as starting our retirement savings made the whole thing seem a lot more doable. And I wouldn’t discount helping the savings thing along with small payouts like finding change or taking online surveys. The extra money I get from sites like Ebates and FusionCash isn’t a ton, but it gives me an extra cushion around my unknown monthly expenses, like gas and groceries, so that I don’t fall short of my $500 a month savings goal.

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chacha1

I save little bits in a lot of ways (like a change jar, a quarters jar (for laundry), a Mad Envelope for $10 bills, automatic 401(k)) but my big savings have come from some big lifestyle choices.

First, keep working in a job that is both monotonous and stressful, but pays well and offers good benefits.

Second, keep driving the paid-off cars.

Third, keep the HSA funded and renew AAA every year.

Fourth, don’t pay to have others do what I can do myself.

By doing those four things I get to live exactly where I want to live, travel, indulge in an expensive sport, and realistically plan for a secure retirement.

There is no more reason to reject Donna’s suggestions for “snowball” savings than there would be to reject the same suggestions for “snowball” income. Whether you need more money to cover your bills or you need more money in order to build an EF, the principle is the same.

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Tara C

I am lucky enough to make a good salary, but for years I went with no emergency fund because I waited until the end of the month to set money aside for savings,and there just wasn’t anything left over after all my spending. So I took a different tack six months ago: Decide how much I wanted to have saved within 2 years, divide that up by 52 paychecks, and then have that amount auto-deposited into an online account with no debit card access (to help me not spend it). It’s working like a charm.

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MOR

Tyler, obviously a lot of the advice in this piece is aimed at people with far less income than you. If I saved $1750 each month, there wouldn’t even be enough left over to pay my rent. Is it really so outside your imagination and/or experience that having even $10 a week left over after necessities is a challenge for some people?

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Mom of five

I liked this article. In 2010, we had about 20k in unforeseen expenses, mostly medical. We’ve replenished our EF and then some, but knowing we could get hammered so quickly makes the amount of our savings seem paltry. Our plan is to maximize our savings for the first six months of the year using many of these tips.

FYI, the coins in the jar typically yields us more than $600 in Christmas shopping money each year!

Unlike most of the posters, we feel more motivated when we have less in savings. Breaking down our accounts into targeted accounts has racheted us up a notch. e.g. “we can’t go out to dinner – that money needs to go into the car replacement fund!” All of a sudden the nickels and dimes seem to matter again.

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Amanda

I’ve lived in the city, in the suburbs, and in a foreign country in both the city and the ‘burbs (and for far longer than a month) and don’t really get the point of that comment. In some areas, you don’t need a car. In some areas, it’s hard to live without a car. In other areas, it’s impossible to live without a car if you actually expect to show up at work and buy groceries. (And for those who say it’s not impossible, I say go put yourself in the middle of Iowa on a corn and soy bean farm and tell me how well you do with a bike.)

Anyhow, I actually think laddered CDs are an excellent way to save emergency funds. I have my emergency fund set aside in four CDs, each one for one year. They come due in January, April, July, and October. Most emergencies are NOT going to require your ENTIRE fund. You will be close enough to one fund coming due that you can wait for it to come due and cover the funds then. If that’s impossible, you can liquidate one quarter of your savings and only lose the interest on that quarter. If you need to, you can liquidate half the funds, etc etc.

I’ve used the emergency fund to cover root canals and plane tickets needed for funerals. It’s absolutely necessary to have an emergency fund.

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Marly

As Chris Brogan of Escape Velocity has pointed out several times, you might be able to save 30%, maybe even 50% of your grocery bill by cutting out the junk food, but you can’t save 100%, unless you are willing to spend half the day foraging for your food in streams and fields. The other half of the equation is to earn more money than you spend. In theory, I could save a lot of money by, for example, not owning a car, but I live in Small-Town, Michigan, and the public bus system doesn’t run at night or on weekends, etc.and it often takes an hour just to pick you up. I would be severely limiting my ability to earn money by not having a car, as much of my work involves marketing my workshops, stand-up comedy and storytelling venues to various local organizations and businesses. The old adage about having to spend money in order to make money decidedly holds true.

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Amber

There is a lot of emotion and judgement here even when it stays on topic. We are all on the same blog so we are all in the same boat, even though like tb 50 says we all have different starting points.
The emergency fund poster’s point was to say that where you are starting today, you may be very far behind that tomorrow without the fund.
I love the commenter who named her fund “my car is exploding on the side of the highway”.

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Cely

It’s all about automation for me. But honestly, I found it really hard to enjoy saving until I hit some meaty numbers in those accounts. The small amounts were not motivating, they were almost depressing!

Luckily, I was able to make a few big deposits (like an unexpected bonus at work) and once the accounts were bigger, I was much more excited to save. So I could see the value in selling off some stuff to kick start a savings account, and ramp up the motivation.

I use mint.com and it keeps me focused on saving as well. I love seeing my EF, it’s reassuring, and I watch my savings go up, and my net worth increase. I also use mint at the end of the year to review all my spending categories; I can even see how much I spent at a single retailer (I’m cutting WAY back on Whole Foods this year, let me tell ya). I am always unpleasantly surprised by a few categories and that allows me to consciously try to reduce spending in those areas for the new year. It also helps me verify that I’m not spending money on categories that are not priorities for me.

All of this helps me keep my priorities straight and ensure that I am saving enough. I strive to save more each year.

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tb

@ tyler. i see your point but i would hope that as one learns that saving is not so hard as believed, the amount put into saving would increase.

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Eric Lowery (Thrifty, Wealthy & Wise)

Powerful stuff here. Having an emergency fund is CRUCIAL for smoothing out financial bumps. I Dave Ramseyed my EF by socking away as much as possible as fast as possible to get to $1,000. I kept this for about a year while I finished off a little bit of debt. I got debt free last october and splurged on the family for Christmas. Now, with a side hustle and savings from my normal job $36k/year), I’ll be at $10k in about 5 more months.

You CAN save, you just have to make it a priority. Once it’s a priority…it’s as easy as it once was to grab that overpriced 20oz coke from the machine…

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Donna Freedman

The point is to start somewhere, and while $2 a week isn’t much it’s, well, a start. This works well when you use more than one frugal hack, e.g., “street funds” plus recycling money plus the money you save not smoking cigarettes or going out to lunch.
Lynn, the woman in the article, did it this way and it inspired her to keep going. Incidentally, she takes a nice vacation each year — and pays cash. That’s why she has a vacation fund along with the EF and other accounts.
I’m enjoying the comments. Keep ’em coming.

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Spedie

I am one of those strange people out there with a 12 month + emergency fund. It took me 3 years to built it that large.

I cut back as much as I could. If I needed a tire, I went and got myself a good used one and did NOT buy some overpriced, new radial, and NOT on credit!

It was a bit painful to do what I did…but now I am so blessed with that fund. I figured which would be more painful? Doing what I did….or having a major emergency come along (like my 2 job losses as a single mom in 13 months) and losing my place to live, with no food for me and my daughter!

I treated the emergency fund like am emergency in itself – and it was a wonderful decision to have made and accomplished.

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Vanessa

@ #51 Audrey

Last month I had 3 paychecks. I’d never been able to save the extra before, but this time I was determined. As soon as that first paycheck was direct deposited, it went straight into ING. It helped that I always use last month’s income to pay the current month’s bills. Money I earn in the current month will pay next month’s bills. It took awhile to get this system working smoothly but it was absolutely necessary to help me break the living paycheck-to-paycheck cycle.

I hope you’re able to convince your coworker that if he’s been surviving on 2 checks/month all this time, he has the discipline to save that third check. Even if he could save half of it, it’s better than nothing.

And I agree with Tyler that in the long-term, small amounts of money aren’t going to get you very far. However, it’s not just about the money, it’s also about the habit. If you get into the habit of saving anything on a consistent basis, even a dollar, when your finances improve you’re more like to save that extra money rather than waste it.

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Tyler Karaszewski

@tb:
I’m not trying to be insulting, and I know the site’s called Get Rich *Slowly*, but at $2/week, you could save for 50 years and you’d still barely be able to afford a really cheap used car. It’s just not enough. It just seems like you’re going to have to come up with a way to save at least 10 times that if you have any actual goals you’re working toward, even if they’re small.

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Jeffrey

Very good points here. I think most people tend to get overwhelmed when they hear that they should have a 6-month emergency fund (myself included). Looking at it that way seems daunting, but starting little by little is an easy solution to that.

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Audrey

I also have automated savings built into my budget. I get paid every two weeks, which for most months is two paychecks per month. So, I budget as if I only have two paychecks. That means two months out of the year (one in the spring and one in the fall), I get an extra paycheck that is outside of my budget.

100% of this paycheck can go towards savings, or in my case, paying off student loans. I tried to explain this to a co-worker, but he didn’t get it because if you treat one paycheck as towards rent and then next as bills as he does, there is no “extra paycheck”. It requires sticking to the budget, but it’s great tricking yourself into “surprise” money.

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tb

@#45. while it is great that you have $800+ deducted from each paycheck, not everyone can do that. what may be a pittance to you, actually adds up to me. a little less condescension would be appreciated.
i think the point of the article is that you have to start somewhere and everyone has a different somewhere. mine is rounding up, not spending change, and selling cans. no, it isn’t 800 dollars, but it will be.

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akajb

I love the idea of automating my savings. However, my income usually changes every four months, but can be different among each set of four months. It’s hard to know if this month I can move over $200, or if this is the month I’m going to NEED $200 just to get by.

Last year, for the beginning, I did work at moving the extra from my chequing account over to savings at the end of each month. But, I couldn’t keep it up once I had to start paying for plane tickets and hotel (and needing money to pay off the credit card before reimbursement).

I haven’t figure out the best way to try and save this year. I’ll have to see once I get paid – which happens once a month, on the 2nd last business day of the month.

Any thoughts?

ETA – I agree with Ely and Tyler about bikes and cars. I can’t tell you the number of times I’ve almost been hit by cars not looking to see if I’m crossing a street (in a crosswalk) and never by a bike. But, yes, some cyclists are idiots – just like some drivers.

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Linda

Donna’s point about banking the savings from lifestyle changes can definitely work. One of my friends used to smoke and when she quit she added to her incentive to stay quit by creating her “cigarette fund.” The “cigarette fund” was where she banked the money that she would have spent buying cigarettes, and she allowed herself to use this money for fun splurges and vacations. Every year, she adjusted the amount she saved to keep pace with the increasing cost of cigarettes. She’s still adding to her “cigarette fund” and she hasn’t smoked in over 20 years now. Last year she used the funds to go to Morocco; this year she’s going to Egypt. 🙂

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Ely

“And why do the people who love to bitch about how cyclists don’t follow the rules and run red lights never do the same about drivers who constantly speed, change lanes without signaling, roll stop signs, etc? 99% of road users are breaking a rule every ten minutes, don’t pretend cyclists are unique here.”
This.

On topic: It’s true these amounts are piddly, but for people living close to the bone they make a difference. For others, not so much. I’m kind of in between; some of the suggestions are valuable, and some are not worth my time. Time to gather up some books to sell… yay for Powell’s. 🙂

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First Gen American

I had many failed attempts at saving an emergency fund. I finally had some success when I actually decreased the amount I was saving for an emergency and built it up slowly over time.

When I saved every last nickle for emergencies, I had no buffer in checking, so I would always tap my fund. So now I have a double buffer, the checking cushion plus the small amount tucked away every month.

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Tyler Karaszewski

I agree that the example is a bit ridiculous (financing a single tire for a year? Really?) And the complaint that with interest it takes “14 months” to pay back — that’s only two more payments than it would be with no interest at all. It’s less than $20 total. It doesn’t make the interest payment sound so bad.

The numbers in this article are so small as to seem inconsequential. I mean, it talks about setting aside $2/week, making the assumption that in the long run, it adds up. And then it tells you that after a *year* you have $104, which we can gather from the rest of the article, is not quite enough to buy a single new tire for a car.

How can you read that and *not* think, “what’s the point?” Especially if you’re trying to save up a $500 emergency fund. What if you have an emergency sometime sooner than four years from now? In the last four years, my salary has doubled, I’ve moved to new cities twice, and I’ve gotten married. If *I’m* still working on that $500 emergency fund, it seems like I’m just going way too slow.

Every paycheck (bi-weekly) I have a total of $875 deducted into two separate savings vehicles (a 401k, and an ESPP) and that actually adds up to something. $2, or $10 seems like nothing at all.

I guess “a little” is better than “none”, but in this case, just barely.

And why do the people who love to bitch about how cyclists don’t follow the rules and run red lights never do the same about drivers who constantly speed, change lanes without signaling, roll stop signs, etc? 99% of road users are breaking a rule every ten minutes, don’t pretend cyclists are unique here.

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Rachel

I like Jan’s suggestion. I really wish I could ride a bike wherever I went. This just isn’t possible for everyone. Sure would help the inversion we are facing here in Utah.

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abby

Automating my savings has saved my butt. I started out by having $50 automatically withdrawn from my checking account every payday and transferred to an ING savings account. I like it because it’s accessible without giving me same-day access to the money – I know I’d spend it as fast as I get it that way. I’ve upped the payday withdrawal by $5 every so often, and I’m currently up to $70/payday. Next payday’s transfer was going to push me over the “minimum” I want in the emergency fund, and I was so excited to be able to shift some of that recurring draw to paying down other debts. Of course, now I have to have some unexpected car repairs done, so the fund is going to dip a bit again, but I’m reminding myself that that’s ok – that’s why the fund is there in the first place! I can replace the windshield on my car and not have to turn to credit cards!

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Lincoln

I think the better way to look at this is that you are going to need an emergency fund one way or another when an emergency arises, so wouldn’t you rather plan ahead and have one ready to go? The alternatives to ready cash are more costly, stressful, and/or uncertain.

I’m sick of all the bike-riding and coupon-cutting testimonials. I get it. I just happen to hate riding bikes and cutting coupons. The bicyclists in the city that I live in are constantly running red lights and stop signs — and riding on the sidewalks where they are not allowed. If you decide to go the bike route, at least try to obey the traffic laws.

Note: I walk and use public transportation for work.

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Des

RE: Jan – I don’t think its a cultural thing, its a sparse population thing. In big cities, public transportation is good and there are sidewalks to walk on. But in small to mid-sized cities it isn’t so.

I used to walk an hour down a highway with no sidewalk or bike lane just to get to the nearest bus stop, and then it was an hour bus ride to work (it would have been a 20 minute car trip in total). I was only able to do that because I was young, single, and only worked part time, so I had time to burn. I would NEVER do that if I had children in tow, it was way too dangerous.

That is not to say that people should have cars if they truly can’t afford them. But, in a lot of areas a car is as much a luxury and having two sets of clothes. Do you *need* more than one set of clothes? No, but the minute you have the means to buy a second set you will.

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AC

for a while, everytime I got a receipt that showed me the dollar amount I saved while shopping I put that amount in savings. It adds up pretty quick.

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Charles

I was amazed at how much extra money we have after creating a written budget. We set aside a set amount for out ‘blow’ money, food, gas and household items.

A few years ago I sat down and totaled our monthly payments, divided that in half and have that much taken out of my bi-weekly paycheck and put into a ‘bill paying’ bank account. All of our bills are on autopay (utils are taken out by the utility companies and the rest is paid using the banks auto billpay). Since I get 26 checks a year, that’s an extra month’s worth of bills that gets deposited into that account. Enough to make extra payments on credit cards or to help add to our emergency fund.

The remainder of our paychecks go into our other account and we take out cash for our ‘blow,’ gas, food and household expenses end put that into envelopes. We leave a little in that account for small emergencies. We do have an emergency fund, but that’s for BIG emergencies.

This has been working for us for a while. But, it was changing our behavior that made the difference. We are finally living below our means, paying off debt and not aquiring any more debt. We haven’t used a credit card in over 6 months, even for emergencies.

As far as retirement savings, my wife and I are public-sector employees who have to pay into a mandatory plan. Almost 10% of our gross goes into that account with our employer matching that same amount. We also invest in a 457, deferred compenstion plan.

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Rosa

I spent a year in a small town in Germany where I biked everywhere and loved it. I took the train to the next town to visit friends and took the bus to closer areas. I love the idea, but America is just not set up that way.

Most locations in the US you cannot hold a job or have a life without a car. Obviously some cities with good public transportation are the exceptions, but most of America does not have that option.

That being said, I live in the Phoenix area my husband and I only have one car and a scooter and that saves us thousands a year. However, life would be very hard without the one car. We could never visit our parents or his brother who live 1-3 hours away (no public transportation to get there) It would take hours each week to grocery shop with public transportation. My commute to work would double. I have tried to ride my bike, as I love road biking, but nearly lost my head several times to trucks and stupid drivers. Not even a good bike lane to be found. (Also different than Europe) You just can’t compare the US to Europe when it comes to car ownership.

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Evangeline

Many years ago when I was single and wondering how to make ends meet, I started rounding up in my checkbook, just because I was too darn overworked and tired to be bothered with trying to balance the checkbook perfectly. My lifestyle never changed and I never kept track of the ‘extra’. Five years later, I nearly fainted when I learned I have over $2600 and it took no effort at all. It really is true that every little bit helps.

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Lindsay

I saved up using the automated small withdrawal each paycheck. You can increase the amount if you find you still have a comfort level, you can increase the amount if you get a raise. You can put any bonus or tax refund in there, too. That’s how I built mine up. Now the money I had been automatically saving into the emergency account has been diverted to more ‘fun’ savings accounts.

CD ladders are a good idea in theory, but it was just as hard for me to save up for a CD as it was to save money in an emergency account. And my ‘ladder’ ended up being only two CDs because I couldn’t devote that much savings to it. And a two-CD ladder is useless in an emergency unless it happens at just the right time of year. Also, I earn more using my rewards card than I do in interest on my CDs. 😛

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Andrea

I used to live in downtown Sacramento without a car. We have a good light rail system. I was a lot skinnier (without even trying) however, life was limited (and I didn’t even know it). When I bought my first car I realized how great it is to have one. I now commute 20 miles to and from work each day (not fun). I want to get to a lifestyle that is in between. I want to walk to and from work, but I want my car on hand just to have.

I refer to my efund as “my car is blowing up on the side of the freeway fund” The name alone reminds me not to touch it.

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Karen

A friend mentioned that he had several boxes of baseball cards that he wanted to try to sell. We worked out a deal that I would help him sell the cards on eBay in exchange for half the profits (we can usually avoid fees by taking advantage of their no-fee posting specials or by keeping bid prices under 99 cents). At first I didn’t think it would amount to much but in just a few months we’ve already made well over $100. We spend a couple of hours every few weeks on this project – he sorts and prices the cards while I scan and post them online. Yes, it is a bit tedious at times, and it’s not a huge amount of money but I get to earn a little extra pocket cash by pretty much just hanging out with a friend. And, I’m learning a lot about baseball cards – I still don’t really understand the collecting of them but it’s fun to see which ones sell and which don’t. People really will buy anything! This type of thing may not be for everyone; I’m also the type of person that saves grocery receipts all year and then adds up how much we saved by bringing our own bags or with coupons (in 2010, almost $450!). Someone else mentioned nickel-and-diming your way to savings – it’s certainly possible, or if it’s not huge savings then at least you may come up with a little extra to go see that movie, or buy that pair of shoes (or baseball cards!)…

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elisabeth

Geography really plays a role. Good public transportation is getting more rare in a lot of the US, and more expensive in many places, too. And, where you live even affects things like “street money.” I’ve been willing to pick up street money for more than a decade. I save it all year and put it in my checking account on New Year’s Eve. In all that time, I’ve never had more than about $7.00 at the end of the year (sigh). A friend who tried this for a few years was more successful — she spent time every day walking to and from her gym and for some reason that route was really productive, she would find actual folding money! But even she didn’t get over $20.00 for the year.
Still, it has been a fun hobby, and my understanding is that in big cities there is a lot more to be found on the streets.

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Rosa

I’m another “try living without a car until you can afford it” – I’m from a very small town, only 2 miles across, and when I started biking there it was TERRIBLE, people threw things at me from car windows and tried to run me over at corners. But it gave me the freedom to up and move after less than a year of living there & working a not very highly paid job – I wasn’t tied down to the car loan so many of my friends got as soon as they were old enough to sign the papers.

But about the instant gratification- it’s not all about your future self. That $10 in savings can be an instant *mental* gratification, look at me, I’m getting more responsible, I am taking care of myself, I’m acting like an adult, etc. It’s all about the mental self-talk, not just sacking up and deferring gratification.

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Amber

@28 Kandance I don’t understand your challenge.
Please elaborate how are you appreciating fresh food if you are living on packaged staples that cannot be close to fresh?

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Vanessa

@#17
“I’m wondering how many people actually experiment with different lifestyles before committing to one–how many adults have ever tried not owning a car for a while in a place with decent public transportation? (What fraction of Americans have grown up in the suburbs and then tried living in a city? How many have never lived for more than one month in another country?)”

I feel your questions are loaded with judgement. In most places, public transportation is either not decent or plain non-existant. I don’t live in the suburbs, but I understand that for some people due to economics or their personal preference, it’s what works best for them. And what does living in another country have to do with anything?

Most people try to make the best decision they can based on their current circumstances. No one buys a house, car, or pet with the idea that they’ll be unable to afford it in the future. Sometimes they don’t plan as thoroughly as they should. But it doesn’t make them bad people. Just people who have made a mistake. That’s why articles like this are written, to help those who have gotten over their head find their way out. Unless someone is personally asking me for money, I feel I don’t have any right questioning why they choose to live the way they do.

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Amber

I just started secret shopping for extra $$. I made $45 just for test driving a new car and writing a little report.
It is really fun for the secret actor in all of us – plus you get to pretend you are living ‘the high life’ when really I don’t even own a car!
That money is part of my overall financial goal to fund $5,000 into an IRA this year. I know it won’t happen overnight, but if I an make that extra even every two weeks, that is $1170!

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Kandace

I’ve saved money by participating in my own pantry challenge. In 2009, we went two months without grocery shopping. Last Jan-Mar. we went three months. While it can be a “challenge” it’s certainly a way to use up what you already have, appreciate fresh food, and save some serious $$.

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Laura in Cancun

I agree with some of the previous posters. While these are great tips for people who really are in a tight spot, not having enough money to save after monthly expenses is a larger issue that should be addressed by re-examing your budget.

I’m a newlywed, and we’re only living on my salary since my husband’s in school. We haven’t been saving because of a lot of extra expenses (our wedding, my sister’s wedding, Christmas and buying some furniture for an empty house), and we think this is unacceptable…

so we’ve put our entire budget into an Excel sheet and are starting to see where we can cut back to start saving and investing, even if it means having an empty living room for another year and not owning a car for another 5 years.

The good news is that once my husband starts working, we should be able to save/invest his entire salary, but we’d love to learn to start saving some of mine as well.

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Kate

In response to the comment about pets…I agree, if you can’t afford proper care (shots, food, emergency vet) then you shouldn’t own one. I’d have to say, though, that I got my dog eight years before I lost my job.

I now sell my plasma to bring in a little money. When I couldn’t afford to repair my truck, I sold it to rebuild my Emergency Fund. (It was paid for, 1999 model and had 200,000 miles on it). Selling stuff on eBay and Craigslist will give you a start for your Emergency Fund. It will give you a cushion while you are changing your spending habits.

As for changing your habits, do one or two things at a time so you don’t get overwhelmed. I found Dave Ramsey worked for me.

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El Nerdo

A couple of notes on the selling of stuff:

Ebay used to be a good proposition, now they skewer you with fee upon fee and then they have a second helping of your money with paypal. Then there’s the shipping they calculate for you so no margin there.They are really squeezing the last penny the can so I find it worthless. And I’ve never tried craigslist because I don’t want weirdos calling or coming to my home.

So the best thing I’ve found is flea markets– for a flat fee of $10 to $25 a day (in my area) you get a spot with parking, electricity, and crowds willing to buy stuff. It actually turned out to be lots of fun to peddle the merchandise, and coming home at the end of the day with a wad of cash was a nice reward.

This past holiday season we made a killing at flea markets. People would buy things we didn’t even know could sell– used clothes rejected from the consignment stores, paperbacks, hats I haven’t worn in years and thought I should trash, a digital TV converter like the bazillions you see going unsold on ebay… all cash, no commissions, no waiting, no trips to the post office; if you price it right for your market, *everything* sells. Different markets will have different crowds with different tastes/needs/incomes, so know your demographics and you’re good to go.

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Beth

Two things:

1. In June of 2010 my husband’s brother passed away suddenly and unexpectedly at the age of 48. He lived in the same town as my in-laws, 10 hours away from us. Obviously, my husband wanted to get there as quickly as possible, but I really didn’t like the idea of his taking on a long drive while he was so shaken. Thanks to our emergency fund, it wasn’t an issue. We called the airline, booked a flight, and didn’t have to worry about the cost of the ticket. We could handle it. I’ve never been so relieved to have some money set aside.

2. We started a Christmas fund by having $10/week automatically transferred to a dedicated ING account. We pretty much forgot about the $10, but at the end of the first year, it was great to have a few hundred dollars to shop with. The next year, we upped it to $15/week and haven’t really felt the pinch in our day-to-day spending.

What I’ve learned from these two things: An emergency fund is worth an awful lot in a real emergency. And automated savings is what really works for me.

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Simon Zhen

Taking a step back to compare the effectiveness of a retirement plan and an emergency fund could shed light as to how accounts such as 401k’s and IRAs tend to bulk up savings more than the typical savings account.

Retirement plans are the backup funds for the future while emergency funds are backups for now. While retirement accounts have benefits, their restrictions and penalties deter people from pulling money out. The mentality of “No, I can’t touch this money until I need it” is too easily broken.

Online high-yield savings accounts are slightly inaccessible but people can still see a chunk of savings. There will be much needed willpower against spending it.

CD laddering is a great long-term semi-liquid savings method but as an emergency fund – it’ll be difficult to pull money on a whim.

One way to make it difficult to pull money while also instilling that “No, I can’t touch that money” mentality is a no-penalty CD such as that offered by Ally. It will still require determination in building the initial deposit but Ally’s No-Penalty CD doesn’t require a minimum balance – so you can even build a no-penalty CD ladder!

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K.C.

Instant gratification gets us into financial problems. The same desire for instant results can keep us from accumulating savings. In the beginning, developing the saving habit is more important than the amount saved. Once the habit is established, the amount saved will grow. Success begets success. It’s the starting that is difficult. Thanks for the suggestions.

I think people should be aware that a $500 emergency fund, while better than nothing, is next to nothing for most emergencies. People need to be told the truth about personal finance. The same goes for retirement planning. The amount of money that needs to be accumulated is daunting. But it is what it is and we need to act accordingly.

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Kelly M

I think it’s a great shift in perspective when you can start thinking about making things easier for your future self, like the woman who started out saving just $10 a month, but a decade later had a six-month e-fund. A lot of people who end up in debt are big on instant gratification, so it can be difficult to change this mindset. But once you do, it’s freeing in a way. Maybe you can’t afford a house right now–but if you save just X amount each month, you can afford one in 10 years. Or maybe you’ve been unsuccessful in changing careers–what can you do to set yourself up for a career change in 10 years? What could your emergency fund look like in 10 years? A decade might seem like a long time, but I wish I’d thought of this when I was 20…

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Jon

Automating has worked very well for me for all types of accounts (retirement, emergency fund, holiday gifts, trips, etc…).

Each time, it surprises me how little if at all I miss the money that’s being automated. I’m positive it would have been spent if not automated.

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Cyndi

I think I’ve used just about 75% of the techniques listed – selling a couple of things, saving the change from breaking a dollar (that’s anywhere from $10-$30 a month for me), but automating savings is really the Holy Grail of savings. My first place I bought using a down payment from savings bonds, money automatically taken from my check each pay period. All of my bills are on automated payment now, with short term savings and a Tax Sheltered Annuity (TSA) just part of the group. So that’s my number one strategy – Make It Automatic.

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Anonymous

To follow up: I personally lean on the side of overall structural changes in one’s lifestyle rather than scraping pennies together. I find when I focus on the latter that I cut back on stupid things, like fresh green veggies.

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Anonymous

Jan’s comments are right on. I don’t understand people who own cars and then can’t pay for tires or pets and can’t pay for their medical care (or have kids and can’t pay for basic things… though I realize this is a contentious point, and other circumstances can intervene). It makes no sense to me. I think people need to recalibrate what it means to live within their means. I’m wondering how many people actually experiment with different lifestyles before committing to one–how many adults have ever tried not owning a car for a while in a place with decent public transportation? (What fraction of Americans have grown up in the suburbs and then tried living in a city? How many have never lived for more than one month in another country?)

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MikeTheRed

In reply to #12 dmm219 –
I love the idea of the laddered CD, especially doing it every month. The main concern I have is that first year as it’s being built up, you’ve committed a lot of cash into a place you can’t get to it. For the first 12 months, you’ve lost that liquidity. Now, after the first one comes due, you’re in a terrific position going forward as every month you have cash coming available to reinvest, or use for other needs.

But right now, the returns on those CDs are only marginally higher than a high interest savings account. On $1,000, an Ally Bank 1yr CD would earn you just shy of $13. My 1.1% ING account would earn me $11 on the same amount. By locking away the money for one full year, I’m gaining $2. At the moment, that’s not really worth it to me to lose that liquidity.

CDs are great when rates are high. And a laddered CD is a good option for those who couldn’t trust themselves to not touch the money for a full year. But at the moment, they’re not a great financial choice.

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dmm219

A good plan I have used is to build a CD Ladder E-Fund. Its fun, you can start small, and it makes you WANT to save.

SImply start by taking some money, any money, and buy a 12 month CD at the beginning of any month. Then challenger yourself to do the same thing for the next 11 months, you will now have one full year of CDs, one coming due each month. As each comes do, reinvest and add more funds…the idea is that each on of these CDs will represent a monthly paycheck if you ever get laid off…

you also get better interest rate performance this way and can catch rising interest rates quicker…

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sashie

Like so many pieces of personal finance (and really any other change you may attempt to make in your life) – find the practice that works for you. Try several ideas (in consecutive order) to see what works best. When you find the savings plan that works – stick with it.

Money does add up quicker than you think it will if you aren’t use to saving. Sort of the reverse of money being spent quicker than you realize when you get your credit card bill each month. 😉

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David Hunter

Like everyone is saying, “baby steps.”

Nothing happens over night. So, if someone wants an e-fund they have to start small and after a year they’ll be suprised at how much they really saved.

I know some people will say a year is a looong time, but for me it ZOOMS by.

@DotCOMreport: I think what Derek said about selling stuff you’ll never use is a great idea. It’ll jump start the e-fund and give motivation to keep going, even after you run out of stuff to sell.

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aproustian

Jan, it’s a great idea for some people in some places, but often in the US the public transportation in smaller cities is dismal and effectively unusable. Personally I bike in the summer but drive in the winter (I’m not good at biking through feet of snow).

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Crystal@BFS

When my husband and I were first married, we were just out of college and completely broke. I remember thinking that if I could pay taxes and my 401(k) before seeing my paycheck, I could totally pay into an account for us. From that moment on, my husband and I have $125 of every paycheck we get funnelled directly from our bank account into an ING Savings account just for our emergency fund.

That fund gets us over bumps and even eventually was used during stable times for us to pay off our last car loan. It’s now getting built back up from 3 months of expenses to one full year…

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Jan

Maybe we value things differently here in Europe, but the first example in this article made my jaw drop. One would own a car, but not have the money to replace a tire? Why would you have a car in the first place? The costs of owning a car are much higher than the microsavings proposed here!

Get rid of the car, use a bicycle or public transport, until you’ve saved enough to responsibly own one…

Would that be considered weird advise? Impossible? Just curious, not trying to offend.

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Slackerjo

My emergency fund is called “happy savings.”

At work we are doing a lot of overtime because we have to cover for another department. Some people have volunteered for ridiculous amounts of overtime, 30, 40, 50 hours. Paid at time and a half. So yesterday people started talking about what they were going to do with their overtime pay. Not one person said “put it in the bank,” which is exactly where my money is going.

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Tazz

Great advice!

Here’s another tip:
I almost never use the spare change I got so I always keep them in a little fish bowl. My boyfriend does this and I thought its a great idea. I first started doing it because I’d have coins lying here and there arnd the house and it annoyed me because I don’t really use them. So I started the fish bowl fund and let the change swim in there for a while.

The first time it was full, I took it to the bank. Imagine my surprise when I found out there was almost 150 bucks sitting there in loose change! Needless to say, I’ve been putting more spare change into that bowl now.

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MikeTheRed

It’s all about automation, and continually pushing yourself to save more and spend less. Do it in baby steps to make it less painful. Eventually, over time, you’ll find that sweet spot for saving and then you’ll really see your savings grow!

I’d challenge anyone who thinks they don’t have enough money to save every month to try this:

Starting next month, every paycheck, deposit $10 in savings.

The month after that, put $15 in per paycheck.

Every month following, increase that amount by $5 until you start to feel cramped on basic needs and a few wants (simple wants, not a new tv etc). Stop before you over-save for your income level.

If you’re payed twice a month, by the end of 2011, you’ll have saved $770 and be putting away $60 per paycheck.

$770 sure does seem like real money doesn’t it? That piddly $10 in February didn’t seem like much at the start, but by building up, it really accumulates.

And chances are, if you made it that far, you probably don’t even notice the money gone from your pocket for spending since it’s been in such small amounts every month. You’ve tricked yourself into forgetting about that bit of your income and have started to make significant progress towards a very healthy emergency fund.

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Hannah

If decreasing your bills/increasing your earning doesn’t seem possible, you can at least take these small steps. Once you have the emergency fund, you have the breathing room to pursue those bigger changes. It’s hard to envision until you start the ball rolling.

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Sam

Automation is what works best for me, we automate our 401k savings, we never see the money, we never miss the money, we don’t count the money as ours. Same for our other savings goals, we automate what goes into our mid and long term savings accounts. We take that money off the top so we don’t count it as available to spend.

I think that one can snowflake their way to savings just like they can snowflake their way out of debt. I used to pay down debt with $10, $20, $50, any little bit of money we could find, the same can be down with savings.

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FinancialUey

Our bank has a program that rounds up any purchase with the debit card to the nearest dollar. The difference is automatically placed into our “emergency fund”. It’s working like a charm.

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indio

I try to categorize any purchases that I’m going to make into “needs” or “wants.” We “need” food, but we don’t need ready made guacamole. I wanted to get new curtains, but don’t need them so that purchase could be delayed. I also try to stay out of stores as much as possible. Besides, there isn’t really much that I like about shopping – long lines, looking for parking, a wagon, etc. For me I’ve found the best way to save money is to not spend it, instead if there is something that I want I try to figure out how to make it or solve the problem myself. I like baking so when real vanilla extract started to get very expensive, I googled a recipe for homemade extract. I like fresh mozzarella but that is also expensive. It’s a quarter of the cost, if you make it yourself. Same thing for homemade butter and it tastes better too. Oh and those curtains, I bought 4 yards of fabric, on sale of course, and made custom curtains for 4 windows.

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dotCOMreport

The problem with selling things as Derek puts it, is that it is not sustainable. You either run out of things to sell or you keep buying more things so that you have things to sell. To maintain a healthy bank balance that will keep being healthy, I prefer a lifestyle change like Donna recommends. Each person will have unique changes that would cut down on spending and ‘nickel and dime’ them to a healthy balance.

Great practical advice. Thanks!

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Derek

I think that 95% of people could easily acquire $500 just by selling a few things. I just sold my old laptop for $180; that’s nearly 40% of the goal right there!

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